Educational Articles

Dow 30 Earnings: Procter & Gamble - Second Quarter Fiscal 2012

Erik A. Antonson
| January 27, 2012

Procter & Gamble (PG – Free Procter & Gamble Stock Report), a provider of branded consumer packaged goods, has reported second-quarter results. (Fiscal years end June 30th.) The company's top line came in at $22.1 billion, up 4% compared to a year earlier, but nearly $150 million shy of our estimate. Share earnings, net of one-time impairment, legal, and restructuring charges, were $1.10, down a penny versus the year-earlier tally. We were looking for share net of $1.08.

The revenue advance was driven by higher volumes and better pricing. More specifically, volumes rose 1% behind overall market growth and ongoing expansion initiatives. (Volumes were up in the high single digits across most developing regions, while demand slumped in the mid-single digits in the majority of developed markets.) Broad-based price increases across all segments and geographies, put in place to recover higher commodity costs, boosted revenues by 4%. Finally, product mix and currency swings reduced sales by 1%.

All six of P&G's segments delivered top-line growth. The Beauty, Grooming, and Health Care segments all notched 1% sales gains. Snacks & Pet Care revenues were up 3%; Fabric Care & Home Care sales rose 5%; and Baby Care & Family Care notched a 6% top-line advance. The story was largely the same across the board: increased volumes and better pricing were offset by product mix and unfavorable geographic distribution.

Earnings were $0.57 a share on a GAAP basis, which included aforementioned charges of $0.53 a share. The gross margin contracted slightly, due to higher commodity costs, though it was partially offset by price hikes and improved manufacturing efficiencies. On the bright side, sales leverage allowed P&G to reduce SG&A and other corporate costs as a percentage of the top line.

Management reduced its top- and bottom-line guidance for the remainder of the fiscal year, however. The company now expects sales to fall between $85.0 billion and $85.9 billion, which is somewhat lower than our previous target of $87.1 billion. P&G said adjusted share earnings ought to be $4.00-$4.10 for fiscal 2012, a far cry from the $4.15-$4.33 expected back in October and well below our prior estimate of $4.22. We have adjusted our targets to $85.4 billion and $4.04 a share, respectively.

Despite the significantly reduced outlook, there was little reaction on Wall Street immediately following the announcement. Indeed, PG stock, which had been recovering steadily and approaching the top of its 52-week range, slipped less than 1% on the news.

We continue to recommend this issue to most long-term investors, thanks to its low Beta coefficient, top Safety rank, above-average yield, and decent, well-defined 3- to 5-year capital appreciation potential. However, owing to the uneven economic backdrop and lackluster consumer spending environment, we think earnings may well be subdued in the coming six to 12 months.